United Kingdom flash PMI data point to cooler inflation as economy stalls

Chris Williamson
July 23, 2023

The early lockdown months of 2020 are excluded.

Service sector input costs meanwhile continued to rise at a rate well above the pre-pandemic average, buoyed principally by rising wage pressures and higher interest rates, though even here the rate of increase moderated to the lowest since May 2021. The strongest rates of increase were seen in financial services and hotels & restaurants.

Selling price inflation likewise moderated. Average prices charged for goods fell for a second straight month, dropping at a rate not seen since February 2016. While average prices charged for services continued to rise at an elevated rate, far higher than anything seen prior to the pandemic, the rate of inflation slowed sharply to the lowest since August 2021.

Measured across both goods and services, the rise in both average input costs and selling prices in July was consequently the lowest recorded since February 2021.

Absent any major shocks, the survey's selling price gauge is consistent with consumer price inflation (CPI) moderating from the current 7.9% rate in the coming months, falling closer to 6% by the start of the fourth quarter and to around 4% into the start of 2024.

Rate hike speculation to moderate

The flash July PMI data come on the heels of a 50 basis point hike in interest rates by the Bank of England in late June. The latest rise takes the main policy rate to 5.0%, its highest since 2008.

Since the latest rate hike, inflation surprised to the downside, albeit merely dropping in line with the signal from the June PMI. The inflation decline meant investors have pencilled-in a 25 basis point hike at the Monetary Policy Committee's next meeting on 3rd August rather than a 50 basis point hike. With the flash July PMI numbers hinting at a further, potentially marked, decline in inflation, as well as a growing risk of the economy falling into decline in the coming months, there will be mounting speculation that interest rates could peak in August.

Note that the PMIs output gauge is now in territory more associated with a lowering of interest rates rather than a hike. While the survey's input price gauge remains elevated, it is clearly moving lower.

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